Markups deconstructed: What each meal really costs a restaurant

Published 2:01 pm, Tuesday, May 24, 2011

A bottle of Veuve Clicquot Champagne might set you back $40 at BevMo. But at a white-tablecloth restaurant, expect to pay more than double that amount.

It's no secret that restaurants boost their wine prices. But in an industry well known for its relatively low profit margins - typically 8 to 12 percent - some things have to pay the bills.

So what besides booze are the most marked-up items on the menu? Buyers for restaurants say that fancy bottle of water with a price tag of more than $3 only costs the restaurant between 40 and 90 cents. Soda from the fountain sells for 20 times the restaurant's cost, and eight times more when it's served in a can. Pasta, pizza, eggs and that little mixed green salad are all a license to make money.

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"I would say that there are no big profit makers like there were in days of yore - rising transport costs affect every sector of the produce world, and while eggs are a more profitable vehicle than steak, they, along with butter, are by no means a great deal anymore," said Dennis Leary, owner of the San Francisco sandwich shops the Sentinel and Golden West, Canteen restaurant and House of Shields bar. "Coffee used to be a nice little markup, but I think prices have risen 300 percent or something."

Tea and booze

Restaurant owners can still rely on tea and booze to raise their numbers.

A cup of tea in a nice sit-down restaurant goes for $2.25 to $3.25, whereas the tea bag costs no more than 35 cents, said Frank Klein, a national restaurant consultant in Palo Alto, Calif. The typical wine markup is two to three times the restaurant's cost, he said. Wine by the glass at a 300- to 400-percent markup is even more profitable than wine by the bottle. Beer costs are roughly 25 cents on the dollar.

"When it comes to spirits, for every dollar a restaurant sells, it doesn't want it to cost them more than 22 cents," Klein said, adding, "These are strict product markups that don't include the vast operating costs that restaurants incur."

But those prices are based solely on the wholesale cost of the item, without factoring in labor and overhead.

"You have to consider the price of insurance, the cost of a liquor license and the expense of broken glassware," said Clark Wolf, also a national restaurant consultant who works in Sonoma County, Calif., and New York City. "Just to wash each glass costs $1."

Then there's pasta.

"No doubt, it's a good profit maker," said Adam Mali, executive chef at Nick's Cove in Point Reyes, Calif. But it's tricky, he adds.

While most restaurants sell their pasta dishes for six to 10 times more than cost, chefs have to be careful about their pricing.

"A vegetarian pasta dish is surprisingly expensive to make, especially when we're using seasonal and local farm fresh vegetables," he said. "On those we just break even. Diners expect it to be cheap, so we can't charge too much."

Risotto is another good profit maker. "I guess you can say most of the carb dishes are," he said.

When it comes to protein, eggs have the biggest markup. Mali said the profit margin for a scramble is about 80 percent.

Pizza is also a sure bet, Klein said. The large cheese pie that sells for $16 to $20 probably only cost $2.50 in ingredients. And those mixed green salads diners order for $8 to $10 cost the restaurant no more than $1.60.

But, Leary warns, "Just because a product costs less, it does not mean that you as an operator will make money - that is to say, you may end up paying more in terms of labor and energy if you save money on the raw materials. For example, one vegetarian restaurant that I know has a stellar food cost - 18 percent (which is 10 to 12 percent lower than a well-run restaurant). But their labor cost is out of whack. I'd say it's 10 percent over that of a comparable, non-veggie show."

Loss leaders

Then there are the items that restaurants practically have to give away to get diners in the door.

"That big rib-eye steak is a loss leader," said Chad Newton, culinary director for Klein's FK Restaurants and Hospitality, a national foodservice group. "You have to put it on the menu. But you can't charge the $40 at which you should price it."

Newton said Dungeness crab is another one of those items likely to be a dining bargain.

"It's always expensive" wholesale, he said. "But in San Francisco you have to have it on the menu during crab season, even if you just break even."

Because seafood and beef prices have soared, most restaurant owners are sucking up the price.

"In my opinion, most restaurant operators are too busy to continuously recalibrate their menus in accord with the shifting, rising costs of goods," Leary said. "You have to hope that you will be busier, and do more volume, down the road, so that while your ratios may be crappy, you will make the same amount of money as you used to."

But restaurants' losses could be the consumer's gain.

During the week at Nick's Cove from 3 to 7 p.m. the restaurant sells oysters for $1 a piece. Mali said he's losing nearly 50 cents on the half shell. But the seafood restaurant hopes to draw crowds with those kinds of specials.

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"It's a loss for us, but hopefully it gets customers in the door, drinking and staying for dinner," he said.

As far as the markups, Wolf said diners have to be practical. "If there weren't some markups, there wouldn't be any restaurants."